Yet another shocker for the Government

(Oct 5, 2013)

In this issue:
» Is higher savings dangerous for the economy?
» The way forward for gold prices
» Here's a greater story than the Feds
» India to once again top the list of global remittances
» ....and more!

00:00

Bad news on the economic front seems to be tumbling out with shocking regularity. Here's another one. Firstpost has talked of a CII survey done on young Indian professionals with dejecting takeaways. Majority of them are now of the view that the economy is in worse shape than what it was after 2008 crisis. What more, even confidence levels are at their lowest. And this is not a 3, 5 or a 10-year low. As a matter of fact, it is the lowest it has been in 20 odd years since the economic liberalisation of 1991.

To make matters worse, there hardly seems any light at the end of the tunnel. Not until the next general elections at least. On the contrary, we won't be surprised if things go further down before showing any signs of improvement.

We know a lot of stats and counter arguments will be thrown by those in power. All with the aim of proving the survey wrong. However, a fact or two at best can be suppressed or can turn out to be erroneous. But if almost all the economic indicators point in the same direction, then something is certainly wrong.

Therefore, the ideal approach in this case is not to bury one's head in the sand and pretend that there's no problem at all. It is in fact to get down to business right away and start taking measures that will help lift the pall of gloom that's descended on the Indian economy.

And what exactly are these measures? Well, they are not that hard to figure out we believe. Since every economy is made up of different sectors, a sector wise study of the challenges that each sector faces in order to create more jobs and increase productivity will be half the battle won according to us. In fact, many such studies will already have been conducted. What remains therefore is their successful execution. And what better time to execute the same than the current crisis we reckon.

This crisis is a grim reminder that we can go only this far with the current set of policies in place. And thus it is high time we listen to these warnings. For failing to take corrective action could lead to outcomes absolutely not in the best interest of our society from a long term perspective. In fact, the problems that high unemployment and a glaring rich-poor gap bring are already flaring up with frightening regularity. Now, it is up to us to pay heed and not let it go out of hand.

Do you think the CII survey is correct in its assessment of confidence being at a 20-year low? Let us know your comments or post them on our Facebook page / Google+ page

One of positive fallouts of the falling rupee would be more inflow of money in the form of remittances. As today's chart highlights, India is yet again likely to top the list of countries sending more dollars back home in the year 2013. As the rupee remains weak, its assets and goods and services will turn out to be more attractive for non-resident Indians, thus leading to higher inflow of money. What more, it could also help alleviate our current account deficit problem to some extent. Important to note that remittances for India and China are more than double those of Philippines, the next developing country on the list.

India to yet again top global remittances chart

Source: Times of India

01:51

Global markets so far have been keeping a close eye on the US Fed and the direction of its monetary policies. What is happening in Japan is probably something that does not immediately figure on anyone's radar. But that could be a mistake. At least that is what Societe Generale strategist Albert Edwards believes. In an article in Business Insider, Edwards opines that the Bank of Japan's massive QE policy combined with rising wage costs is expected to have broader implications for the world economy especially Asia. Because of the quantitative easing measures of the central bank, the yen has considerably weakened. This is expected to put strain on the balance of payments of its trading countries in Asia. In fact, the weakness of the Japanese yen has been cited by Edwards as one of the contributors to the 1997 Asian currency crisis.

Not just that, wages are set to increase on account of shortages of labour. Indeed, because of the rise in Japan's aged population, industries are falling short of skilled labour. All of this point to spike in wage costs going forward. This also means that a combination of spiralling wage costs and higher money supply will lead to a rise in inflation. Japan's economy in the last 20 years has more or less been in a deflationary state. So it goes without saying that a rise in inflation in the country could have quite an impact on the global financial markets going forward.

02:34

Indians have always prided themselves in saving money. It is part of our cultural DNA. It is no surprise that the Western notion of excessive credit and consumption seems a bit unnerving.

In the West, say for instance the US, consumption has often been seen as a virtue. Back in 2002 when the US economy was in recession, President Bush urged his countrymen to spend and bring the economy out of recession. And since saving the economy meant well for the country, spending got equated even with patriotism.

But the US was not always like this. A century ago it was a country of savers. In the 1920s it had the highest savings rate among major industrial economies. Now, it has one of the lowest.

An article on Ludwig von Mises Institute shares a very apt perspective on saving and spending. The whole idea of spending-driven economic growth was championed by the renowned economist John Maynard Keynes. Politicians were more than happy to embrace the idea of cheap money, spend taxpayer money and win elections.

So is saving money a bad thing for the economy? We don't think so. Saving is not unproductive. It is only deferred consumption. And it also leads to better allocation of capital and productivity. But politicians don't like to encourage savings. The US Fed's massive QE program is nothing but an attack on savers.

03:14

It is common knowledge that gold prices have an inverse relationship with the US dollar. Over the years, gold has earned the status of safe haven and has emerged to be an efficient inflation hedge. While gold prices have seen a spectacular gain in the past decade or so, a plunge in the prices this year has also raised some concerns if the metal is overpriced and headed for a correction.

If global economic prospects are anything to go by, gold seems to be a promising long term bet. It is not just the loose monetary policies across economies that support the view. As per a publication by Hard Assets Alliance, even the basic demand supply dynamics support a rise in gold prices. While there is a lot of discussion over demand, it can't be considered in isolation. Physical supply is equally important and this is limited.

As per the article, the large miners are losing money on mining gold at the current price levels despite trimming down the costs. As such, they have little incentive to produce more gold at these prices. Further, they are likely to shut or sell mines with highest operating costs. And this will further restrict the physical gold supply thus supporting higher prices for gold. Just on the basis of demand supply dynamics, the base price of gold stands above US$ 1,300 per ounce. Add to that the impact of reckless monetary policies of governments across the world. The long term prospect for gold prices certainly looks bright.

03:59

Meanwhile, the Indian stock markets ended higher in the truncated week as the Indian rupee remained high. Indices edged higher as the rupee strengthened against the dollar after data released by the RBI showed a lower-than-expected current account deficit (CAD) in Q1 June 2013. According to data released by the RBI, the current account deficit rose to US$ 21.8 bn or 4.9% of GDP for April-June 2013 due to a rise in imports (especially of gold) and shrinking exports. The CAD for April-June 2012-13 was US $16.9 bn, 4% of GDP.

The stock markets in Europe also reflected the concerns in the US economy. As a result, the latter overshadowed encouraging euro zone business confidence data and ended the week with losses. The stock markets in France and UK lost 0.5% and 0.9% respectively while Germany ended flat over the week. Barring India and China (up 1% and 0.7% respectively), the major Asian stock markets ended the week in red.

The US stock markets ended the week down 1.2%. Initial market reaction to the US federal government deadlock was muted, but investors grew somewhat more anxious as the week progressed. Market jitters could build the longer the impasse persists. Reassurances by key players that the US government will not default on its debt have calmed investors for now.

Performance during week ended Oct 4

Source: Yahoo finance, kitco, cnnfn

04:47

Weekend investing mantra

"Since the basic game is so favorable, Charlie and I believe it's a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of "experts," or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it. "- Warren Buffett

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CII survey has been conducted among the young Indian professionals and this would give more appropriate picture about the feelings among youth, about current Indian economy. Majority of the common people are not fully familiar with financial terms and concepts, but can give the opinion about where the economy is heading, sometimes as good as financial experts.

It is becoming evident that, having financial experts as the head of the government may not necessarily means good economy, what is utmost important is the will power to implement the financial expertise and knowledge, and map it from the books to economic problems and deliver solutions in a time bound manner. People have to manage their monthly expenses on monthly basis, and do not have time to wait till next round of elections, to hope that, economy will improve after 3-4 years from now on, and then I will start managing my monthly expenses better.

Simple and realistic solutions to improve infrastructure, encourage business environment, reduce taxes when economy is not doing well rather than giving cheaper food, have great public transport to reduce petrol/diesel consumption, correct pricing mechanism for houses and education, can lead to much better economic stability within 1-2 years itself. May be, currently most of the people are busy else where so these simple things are not on their priority list!!! Till that time, we ourselves have to manage our economic situation and come up with out of the box ideas in our day to day life.

As rightly stated the government will try and underplay the report but it is evident that the economy is in very bad shape. My feeling is that the ex-RBI govenor (and I am sure I am not the only one thinking in that way) out of pressure from the government with their vested interests forced him to reduce interest rates. As a matter of fact I wass telling my colleagues that he would increase them and they laughed when he reduced them. Today I am laughing as we could see the wrong moves and now its worse than before. Government interference is always the root evil in any policy execution specially in a free economy. Se what they did to UTI a total cllapse and investore losing faith in Mutual Funds. High time the government whether this or BJP or any other woke up and did something that does not harm the people.

indias manufacturing sector is dead,because entrepreneurship is finished as it is impossible to start business in india,because his entire time and energy goes in govt.paperwork,and even after paying bribes the harassment an individual has to face and big industrialists shall never get easy money (by fooling public- by way of public issue) and land at throw away price and have no technology

the sentiments are primarily due to the perception that the govt. is not working.the situation is not so gra. as compared to other countries,stock markets are doing fine,growth rate in gdp is o.k.,&current a/c deficit seems to be manageable.what govt. is required to do is to increase the confidence level.

Dear Sir, Your interpretation is at best childish. Probably most don't realise what 1991 was like. Please do not let your individual politics interfere with your interpretation. There is aglobal scenario and there is an Indian scenario.

I concur with the findings of CII survey of the pathetic condition of our economy and the job opportunities. CII has articulated what I can see all around me. Qualified youngsters are not only without jobs but have no hopes of jobs. I can see too many signs of " To Let ", vacant restaraunts and shops, reducing savings etc etc. The portents are scary and ominous. The present govt. should be thrown out and a more decisive leader should be elected with a simple majority to force tough decisions to come out of the present gloom. Further and most important we need the new govt. to bring back the majority of the money salted away by our politicians, bureaucrats and businessmen abroad and use it to create infra-structure and create the environment for enhancing manufacturing competitiveness so that millions of jobs are created. Improve education by offering poor people coupons that can be encashed for fees in any educational institution. Totally eliminate reservations and make our politicians and bureaucrats get medical assistance in India and not abroad.They have created a mess in the health care area and they should be forced to experience it. I can go on and on but suffice it to say that our economy has not been this bad ever. Our govt. should be tried in a court of law for mis-use of public funds for their own benefit at the cost of the common man!!

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